Bellamy’s (ASX:BAL) spree on strategic arrangements

Bellamy’s Australia Limited (ASX: BAL) has been on a downswing lately, with a 10.5% fall seen in last one month and a further 4% drop post market open on July 04, 2018. The infant formula group recently inked three new organic milk deals, and has now taken more control of its cost structure and supply chain. Bellamy’s cited the inadequate supply of the local organic milk to produce its products, as it was criticized for not using greater number of local dairy producers. The agreement signed with Fonterra organic milk pool by partnering with local farmers to convert existing conventional Tasmanian farms to organic will facilitate the development of an organic milk pool in Tasmania.

The first 20 million litres, Bellamy’s has signed up to take from the organic pool annually equates to 10 percent of current production or 2,000 tons of baby formula, and to assist the installation processing assets it will support the development of pool with an initial $5.5 million investment. Also, Bellamy’s and ACM’s (Australian Consolidated Milk) new agreement allows it to invest in converting farmers and gives ACM a secure end customer for its organic milk. However, the group’s arrangements for Australian organic milk supply with Fonterra, ACM and TMI (Tatura Milk Industries Limited) are expected to be yielding returns in long term only and would not result in any immediate change.

ASX listed Bellamy’s otherwise reported net profit of $22.4 million for 1H18 and group revenue of $174.9 million with group EBITDA of $34.9 million for the half year. The group also achieved a revenue of $240.2 million in FY17 with a loss after tax of $0.8 million, and the normalized profit after tax of 28.2 million. The profitability was affected by significant items of $41.4 million before tax.

On the financial front, the group recorded a significant double-digit revenue CAGR over the period of 1HFY14-18 at the back of volume and value growth. This growth reflects a better balance between demand and supply, reduced channel conflicts and improved marketing investment incurred during the period. Normalized EBITDA recorded significant growth at CAGR as well during the same period. Further, the group had upgraded its full year guidance for its core business with revenue growth of 30-35% and EBITDA margin in the range of 20% to 23%, excluding Camperdown. Rising demand for its product mix portfolio into the market may help the group in the long run.

During the first half of 2018, the baby-food maker’s revenue was said to be higher than the second half of the year, driven by the winter consumption in China and Chinese New Year-driven demand. However, the Camperdown business has been a drag and forecasted to record a loss of A$1-2 million now.

Bellamy’s ASX listed stock was trading at a market price of $14.38 as at July 04, 2018 (11:20 AM AEST). The stock has otherwise seen a performance change of 120% over the span of 12 months. However, the recent trading trend indicates that the group might be going out of fizz as investors are booking profits while competition is intensifying and group’s regulatory position in China is yet to see the light of the day.

I am a stock market researcher investing in Australian Stock Market from last 15 years. I keen to write financial blogs related to market research and trend to help investors to stay updated.